The CFPB moved closer to likely rulemaking on overdraft programs with the release late last week of a new report entitled “Data Point: Checking account overdraft.” 

The report is based on account-level and transaction-level data for about two million accounts at large banks covered by the CFPB’s supervisory authority (i.e., banks with more than $10 billion in total assets).  Institution-level data provided by the same banks was the basis for a white paper released by the CFPB last summer that, according to the CFPB’s factsheet, “raise[d] questions about the ability of consumers to anticipate and avoid overdraft costs.”  In his prepared remarks about the new report, Director Cordray stated that the new results “compound” the concerns raised by the white paper. 

The report’s key findings include:

  • For opted-in consumers, overdraft and NSF fees accounted for about 75 percent of their total checking account fees and average over $250 per year. (Under the Regulation E rule which became effective during the summer of 2010, a bank must obtain a consumer’s affirmative consent before charging overdraft fees for ATM and one-time debit card transactions.)
  • Eight percent of customers incurred nearly 75 percent of all overdraft fees.
  • Opted-in accounts were three times as likely to have more than 10 overdrafts per year as accounts that were not opted in.  Opted-in accounts had seven times as many overdrafts that resulted in fees as accounts that were not opted in.  (The CFPB noted that the “underlying causal relationship” between opt-in status and overdrafting “would require further study.”)
  • The median amount of debit card transactions that led to an overdraft fee was $24 and the median amount of a transaction that led to an overdraft fee for all types of debits was $50.
  • More than half of the consumers who overdrafted brought their accounts positive within three days and 76 percent within one week. 

Perhaps revealing of the CFPB’s agenda is the fact that, although not mentioned in the report, the CFPB’s press release states that “the report found” that “[t]he median overdraft fees at the banks studied was $34.  If a consumer were to borrow $24 for three days and pay a $34 finance charge, such a loan would carry a 17,000 percent APR.”  Director Cordray included a similar statement in his prepared remarks.  (The $34 median overdraft fee appears to have been taken from the CFPB’s white paper issued last summer.) 

In his prepared remarks, Director Cordray suggested that overdraft fees are “gotchas” when consumers who have opted in use their debit cards.  The new report, however, does not provide support for the claim that overdrafts are usually accidental.  Most importantly, an opt-in requires an affirmative decision by a consumer, after having received a summary of a bank’s overdraft program and fees, to elect overdraft protection.  In addition, consumers receive written confirmation of their election to opt-in,  are notified when an overdraft occurs, can avail themselves of the many tools made available by their banks to check and manage their account balances, and can opt out of overdraft protection at any time.  FDIC-supervised state banks are required to send reminders to their customers whenever they incur frequent overdraft fees in a
12-month period. 

The report does not address whether heavy overdrafters are engaged in deliberate or inadvertent activity, and whether they are using checking account overdrafts as a substitute for deposit advances and payday loans (which are subject to restriction on a state-by-state basis).  We think this question merits study.  Likewise, the report does not address the impact on overdrafts of text alerts and other mechanisms offered by many banks to notify their customers when account balances dip below pre-set levels.  To the extent these mechanisms are effective, it may make sense for the CFPB to focus on mandating disclosure of this type rather than wholesale limits on overdrafts. 

One thing the report does show—the misguided nature of the action taken by the OCC and FDIC to effectively ban deposit advance products, without analyzing any data bearing on overdraft charges.  Clearly, deposit advance is a much better option for consumers than overdrafts.  

While rulemaking appears increasing likely, it does not appear to be imminent.  In its Spring 2014 rulemaking agenda issued this past May, the CFPB gave a February 2015 timetable for further “prerule activities” relating to overdraft practices.  In the new report, the CFPB states that its “analysis of the overdraft data is ongoing as the Bureau seeks to gain further insight into some of the questions posed by the white paper the Bureau issued last year.  Future Data Points or other Bureau publications will report on further findings.”  This statement suggests that the CFPB’s “prerule activities” are likely to involve additional reports rather than proposed rules.  In light of the financial impact of rulemaking in this area on banks, consumers and the economy, a deliberative process is warranted.